Schwab ETFs™ include both Market-Cap Index ETFs and Fundamental Index® ETFs, two different ETF methodologies that can work well together. For broader diversification, consider using both when building your portfolio.

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An ETF is an investment that holds a portfolio of securities, such as stocks or bonds, and trades like a stock. It can be a low-cost way to build a well-diversified portfolio. ETFs can give you diversified exposure to a particular segment of the market (large-cap U.S. stocks, for example), a specific industry, or a geographical region.

Like a mutual fund, an ETF represents a basket of securities. Similar to index mutual funds, most ETFs provide exposure to a particular segment of the market by tracking an index, such as a broad market, sector, or regional index. When you buy an ETF, you’re getting exposure to all of the securities the ETF holds, which makes it easy to use ETFs to diversify your portfolio.

Like a stock, an ETF trades on a stock exchange, and you can buy or sell shares at any time during the trading day. The price is determined by supply and demand for the fund in the market. As with stocks, you typically pay a commission for each trade, although some brokers offer commission-free ETFs, including Schwab ETFs™ when traded online through a Schwab account.1

Transparency. Most ETFs disclose their holdings on a daily basis and update prices throughout the day, so you can see exactly what your ETF holds.

Expenses. ETFs typically have low expense ratios. The lower the expense ratio, the greater the portion of the fund’s returns that you get to keep.

Risk management. Although investing always carries risks, some risks can be reduced by diversifying across a wide range of securities and asset classes. ETFs make it easy to diversify because they generally invest in many individual securities, and you can mix and match ETFs to diversify across asset classes.

ETFs are a good choice for many investors, but they’re not right for everyone. Like most investments, ETFs are not FDIC-insured, and you can lose money if the market that they track experiences a downturn. If your primary objective is to preserve what you have rather than grow it or generate income, ETFs might not be the ideal investment for you.
Also, you typically pay a commission each time you buy or sell an ETF. If you are dollar-cost averaging, day trading, or making small investments, this can take a big bite out of your investment. An exception is Schwab ETFs, which trade commission-free online for Schwab clients1.

Although low expenses are one of the big draws of ETFs, there are several costs to keep an eye on.

Expense ratios. The expense ratio is the percentage of fund assets taken out annually to cover fund expenses. For example, if you have $10,000 in an ETF with a 0.25% expense ratio, you’re paying about $25 per year in expenses. It’s a good idea to look at the expense ratio of an ETF before you buy. A small difference in annual expenses can add up over time.

Trade commissions. You’ll pay a commission each time you buy or sell an ETF. At Schwab, that commission is $8.95 per online trade,2 although Schwab ETFs trade commission-free online when traded in a Schwab account.1

The difference between market price and net asset value. The price you pay for an ETF will generally be close to the value of the underlying stocks or bonds in the fund, known as the net asset value (NAV). However, the market price can deviate from the NAV, meaning you might pay more (or less) than the underlying value per share. This discrepancy is more common in ETFs whose underlying holdings have low trading volume.

The difference between the bid price and the ask price. There is typically a difference, or spread, between the bid price (the highest price a buyer is willing to pay for a share) and the ask price (the lowest price a seller is willing to accept for a share). The amount of the spread varies from one ETF to another, and tends to be greater for ETFs with low trading volume.

Everybody’s different, of course, but these strategies will give you some ideas:

Building an all-ETF portfolio. You can construct a diversified portfolio by selecting a combination of ETFs that reflects your goals and tolerance for risk. For example, an investor might choose one ETF that covers the U.S. stock market, one for the international stock markets, one for fixed income, and maybe one for real estate, and with just a few trades, he or she would have a portfolio that’s well diversified across major asset classes.

Filling a single asset class. If you already have a portfolio of mutual funds and individual stocks but realize that you’re lacking exposure to one sector, you can use an ETF to quickly fill that gap.

Overweighting a promising area. If you like a particular segment of the market, such as a single country or sector, an ETF makes it easier to gain exposure without having to research and trade a lot of individual stocks or bonds. But do keep in mind that investments in individual sectors or countries can be volatile compared to those that are more diversified.

ETFs trade a little differently from mutual funds. If you’re used to placing stock trades, then you’ll find that placing ETF trades is much the same. If you generally trade mutual funds, or if you’re new to investing, you’ll need to learn a little about placing ETF trades.

When you place an order for an ETF, you are buying or selling the shares through an exchange, such as the New York Stock Exchange. Your buy order is matched up with sell orders in the market. When a suitable match is found between a buy order and a sell order, the shares are exchanged. Unlike mutual funds, ETFs can be traded throughout the day rather than once a day after the market closes, and there are a variety of order types you can use, including market and limit orders.

When you place an order for an ETF, you specify how long the brokerage firm should try to fill your order before giving up and canceling it. Order timing is generally less important with market orders because they tend to be filled quickly, but it can be an important consideration for other order types, such as limit orders. The two most common order timing options are day only and good-till-canceled.

Day-only orders: This type of order stays in force only until the end of the market day (typically 4:00 p.m. ET). If the trade is not filled by the end of the market day, the order will be canceled.

Good-till-canceled orders: This type of order stays in force for an extended period (for 60 calendar days at Schwab). Your broker will try to fill your order throughout each market day during that period.

When choosing an ETF, remember that ETFs with higher trading volume are more liquid, so you are less likely to run into surprises with execution price or timing.

We can help with that too. When you choose one of our professionally managed ETF portfolios, we help you pick a portfolio strategy that meets your goals and risk tolerance, and then we monitor and maintain a portfolio of ETFs with an asset allocation that is appropriate for your strategy. It’s a way to get the benefits of ETFs with professional management at a reasonable cost.

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1. Conditions Apply: Trades in ETFs available through Schwab ETF OneSource™ (including Schwab ETFs™) are available without commissions when placed online in a Schwab account. Service charges apply for trade orders placed through a broker ($25) or by automated phone ($5). An exchange processing fee applies to sell transactions. Certain types of Schwab ETF OneSource transactions are not eligible for the commission waiver, such as short sells and buys to cover (not including Schwab ETFs). Schwab reserves the right to change the ETFs we make available without commissions. All ETFs are subject to management fees and expenses. Please see Charles Schwab Pricing Guide for additional information.

Investors should consider carefully information contained in the prospectus, including investment objectives, risks, charges, and expenses. You can request a prospectus by calling Schwab at 800-435-4000. Please read the prospectus carefully before investing.

Investment returns will fluctuate and are subject to market volatility, so that an investor’s shares, when redeemed or sold, may be worth more or less than their original cost. Unlike mutual funds, shares of ETFs are not individually redeemable directly with the ETF. Shares are bought and sold at market price, which may be higher or lower than the net asset value (NAV).

Charles Schwab & Co., Inc. receives remuneration from third-party ETF companies participating in Schwab ETF OneSource™ for record keeping, shareholder services and other administrative services, including program development and maintenance.

Charles Schwab Investment Management, Inc. is the investment advisor for Schwab ETFs and an affiliate of the Charles Schwab Corporation.

"SPDR" is a registered trademark of Standard & Poor's Financial Services LLC ("S&P") and has been licensed for use by State Street Corporation. No financial product offered by State Street Corporation or its affiliates is sponsored, endorsed, sold or promoted by S&P or its affiliates, and S&P and its affiliates make no representation, warranty or condition regarding the advisability of buying, selling or holding units/shares in such products.

"ETF Securities" is a registered trademark of ETF Securities Limited. The "ETF Securities" logo is a registered trademark of ETF Securities Limited.